Free to Choose?

In response to:

Mr. Heilbroner’s review of Rose and Milton Friedman’s book, Free to Choose [NYR, April 17], so competently deals with their bad scholarship that I hesitate to offer my own objections. However, in their treatment of the revival of West Germany beginning in 1948 I am concerned, not just with their omissions of fact, but with their blatant untruths.

The Friedmans say the currency reform of 1948 in Germany was the work of Ludwig Erhard, who “introduced” the money reform. This is pure fiction. The currency reform was the work of the French, British, and American Military Governments, dominated by the latter. It was announced by Jack Bennett, Director of the Finance Division of US Military Government. My late husband, Edward Tenenbaum, his assistant in charge of currency reform, sat at his side. Erhard was not present.

No German could have announced the new currency, since there was no independent or unified German government at this time, which the Friedmans ignored when they called Erhard German Minister of Economics. He had recently become director of the Bi-zonal (British and American) Economics Administration, but this was under Military Government.

The currency reform was in effect dictated to the German people by the Tri-zonal Military Government. German participation was welcomed, and the many plans they submitted were carefully studied. It was a group of German financial experts who wrote the laws of currency reform under Allied direction at Rothwesten. Although Erhard was closely identified with one of the prominent German plans, he was not a member of this group, and his actual participation in currency reform was minor. In any case, the power of decision was reserved by the Allies, and the final product predominantly reflected the opinions of the Americans.

The Friedmans picture Erhard as battling Military Government bureaucracy in an uphill fight to bring a free economy to Germany. This is nonsense. They quote Erhard as saying he announced the currency reform and lifted “almost all” price controls on a weekend so the Military authorities could not countermand his orders. We know he did not announce the currency reform. What Erhard actually did that weekend was to lift price controls on selected consumer items, a far cry from “almost all.” Furthermore, the minor flap which ensued had little to do with his lifting controls, and much to do with his having exceeded his authority. Indeed, the Americans looked to the currency reform as a vehicle to relax controls, as opposed to the British, who wanted to tighten them. American opinion prevailed; which was fortunate for the revival of the German economy.

The Friedmans’ whole book is a diatribe against government interference and bureaucracy, yet in Germany after World War II the remarkable reconstruction of the economy could not have occurred without a sound currency and massive aid from the Marshall Plan, both accomplishments of the US bureaucracy so despised by the Friedmans. It was upon this base that Ludwig Erhard was able to make his impressive contributions to the German “economic miracle.”

The Germans themselves have never forgotten US prominence in the currency reform. Throughout the years the German press has acknowledged it. In September 1979, an entire issue of Zeitschrift für die gesamte Staatswissenschaft was devoted to currency and economic reform in Germany after World War II. Among the many economists who contributed to it were a number of Americans. It seems impossible that the Friedmans were unaware of the vital role played by their own government in halting the inflation and introducing a sound currency in Germany. One is led to believe that the historic facts did not conform to the Friedmans’ theories and prejudices, so they changed the facts to suit themselves, a dangerous practice which casts doubts on their abilities as scholars.